TRIS Rating affirms the company rating of Land & Houses PLC (LH) and the ratings of its senior unsecured debentures at “A+”. The ratings reflect LH’s leading position in the residential property development market, supported by its strong brand franchise and proven operational track record. The ratings also take into consideration the financial flexibility LH derives from its portfolio of recurring income assets and marketable securities. However, the ratings are partially constrained by a moderate level of financial leverage and an aggressive dividend policy. In addition, the high level of household debt nationwide, coupled with the slow recovery in the domestic economy, raise concerns over the demand for housing in the short to medium term.
LH is one of Thailand’s leading property developers. The company’s revenue was Bt29,909 million in 2016 and Bt17,093 million in the first six months of 2017, ranking it one of the top three listed property developers. As of August 2017, the Asavabhokhin family held 31% of the company’s shares, followed by the Government of Singapore Investment Corporation (GIC) at 16%. LH’s core product is single detached houses (SDH), sales of which have comprised 65%-70% of total revenue annually over the past five years.
LH’s strong business profile is underscored by its brand equity. Its products are perceived as premium residential properties, in terms of product quality and after-sale service. The company offers several landed residential and condominium brands, across a wide price range, in various locations. Its position in the SDH segment is relatively strong. Presales in the SDH segment grew by 4% year-on-year (y-o-y) in 2016 and 3% y-o-y in the first six months of 2017.
As of June 2017, LH’s backlog was around Bt15,000 million. Units in the backlog, worth Bt8,600 million, will be transferred to customers during the second half of 2017, followed by the transfers of units worth Bt4,300 million in 2018 and Bt1,800 million in 2019. TRIS Rating’s base case scenario expects LH’s revenue will range from Bt30,000-Bt33,000 million per annum over the next three years. The operating profit margin (operating income before depreciation and amortization, as a percentage of revenue) ranged from 22%-25% during 2012 through the first six months of 2017. Despite intense competition in residential property market and pressures from rising land costs as well as overhead expenses needed to support LH’s expansion plans, its operating profit margin is expected to stay above 20% over the next three years.
LH’s debt to capitalization ratio was 48% as of December 2016 and 49% as of June 2017. The ratio of interest-bearing debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ranged from 3-4 times during 2012 through the first half of 2017. LH’s bond covenant limits the interest-bearing debt to equity ratio at 1.5 times. At the end of June 2017, the ratio stood at 0.97 times. Although LH continues to invest in recurring-income assets and remains aggressive dividend payments, the debt to capitalization ratio is expected to stay around 50% and the interest-bearing debt to EBITDA ratio to stay below 5 times. LH’s moderate level of leverage is partly offset by holdings of sound income-generating assets and a sizable portfolio of marketable securities. The fair value of LH’s investments in listed associates was Bt53,662 million as of June 2017. Equity income from these investments amounted to Bt2,000-Bt2,400 million per annum during 2012-2015 and increased to Bt3,000 million in 2016.
LH’s liquidity profile is adequate. The company is able to access the capital market and achieve lower funding costs than borrowing from banks. The ratio of funds from operations (FFO) to total debt ranged from 18%-19% during 2015 through the first six months of 2017. The EBITDA interest coverage ratio has been 8-9 times over the past five years and increased to 13 times in the first half of 2017. Over the next three years, TRIS Rating forecasts LH’s FFO to total debt ratio will stay around 15%, while the EBITDA interest coverage ratio will stay above 5 times.
Rating Outlook
The “stable” outlook reflects the expectation that LH will maintain its strong operating performance, acceptable financial position, and competitive market position. Over the next three years, LH’s revenue is expected to be Bt30,000-Bt33,000 million per annum. The interest-bearing debt to EBITDA ratio should stay below 5 times.
LH’s ratings and/or outlook could be revised upward should its capital structure improve significantly from the current level, so that its interest-bearing debt to EBITDA ratio should keep below 3 times on a sustainable basis, while its operating performance remains strong comparable with peers. On the contrary, the ratings and/or outlook could be revised downward should LH’s operating performance and/or financial position deviate significantly from the projections.
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